Only technology will save us

The New York Times has a scary but numerically rich piece on the impending pension crisis in Europe. As in the days of yore Greece looks to be a pioneer. Here's an interesting pair of numbers:

According to research by Jagadeesh Gokhale, an economist at the Cato Institute in Washington, bringing Greece's pension obligations onto its balance sheet would show that the government's debt is in reality equal to 875 percent of its gross domestic product, which is the broadest measure of a nation's economic output. That would be the highest debt level among the 16 nations that use the euro, and far above Greece's official debt level of 113 percent.

The article goes on to survey the problems in much of Europe, and even hints at the impending issues with the retirement of the Baby Boomers in the United States (yes, I know Medicare is the short-term problem, not Social Security, but for people my age Social Security is something we're not too confident of gaining return on to the same extent as past generations). But the issue is bigger, declining fertility rates are occurring across much of the world. Here are a few nations with sub-replacement fertility:

I assume many of these surprise some of you. Much of the world is projected to get old before it gets rich. These issues with pensions aren't going to be a problem for nations without a robust public pension system, but it will be an issue if the productive labor force is matched in number by those who are retired and must be supported by their children. Additionally, in nations with low fertility in the future many retirees will have had no children who can support them, or their children may die or become ill before they do.

Last fall Peter Thiel gave a talk at the Singularity Summit where he noted that institutional investors are now aware of the problems with taking on higher risk for higher yield. But, pension funds are being driven to look for these high risk investments nonetheless because their guaranteed payouts are just too big to fulfill with low risk strategies. Last week The New York Times reported on just this issue, Public Pension Funds Are Adding Risk to Raise Returns.

These looming issues can seem like inevitabilities. But Thiel noted that there is a way out: a return to productivity gains comparable to what was the norm before 1970 through technological innovation. One can't magically make this happen of course, but at least unlike the world before 1800, which was constrained by Malthusian parameters, we are aware that innovation outrunning population growth is a possibility (though to be fair, the demographic transition was probably as big of a factor as the technological takeoff, though it was probably contingent on greater productivity, health and wealth). The other obvious options, pushing up retirement ages so that many of the aged die before they can collect, raising taxation on the productive to massive levels, or a Logan's Run system of social engineering, probably entail the collapse of our current liberal civilization. Consider:

Greece has proposed raising its average retirement age to 63, and that may be just a beginning.

The French president, Nicolas Sarkozy, has met with union leaders and broached the prospect of raising the normal retirement age from 60. Spain has gone further, proposing to raise the retirement age to 67, from 65. In the face of union opposition, however, the government is wavering.

Old people vote, young people do not, young people are economically productive, old often do not wish to be, even if they could be:

He is a full-throated proponent of a system that pays him a yearly pension of 30,000 euros, or $41,000, more than he was making when he retired 13 years ago at the age of 60. He has even written a book in defense of it, "The Guide to Granting Civil Service Pensions in Greece."

"We have to protect our standard of living," Mr. Bourdakis said. "The pensioners should not have to pay for the crisis created by the bankers."

Can democratic governments dependent on the votes of the retired enact legislation against their interests but which might maintain the system as a whole? I assume autocracies whose legitimacy is only backed up by the hard-power of military might can make these "hard decisions." Most of recorded history has been characterized by the dominance of undemocratic institutions and power arrangements as well as a Malthusian world where affluence was the expectation of the few.

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In the U.S., economic conditions are driving a fair number of baby boomers to postpone retirement, (http://www.sunlife-usa.com/unretirementindex/index.cfm.) That should ease the pressure on Social Security. Of course, it also indicates that fewer jobs will be available for young people just entering the the work force -- most likely, not a positive outcome. Perhaps, indeed, only technology can save us.

The article, characteristically for Cato, chooses the weakest European case as typical.

It always surprises me when young people, rather than trying to figure out what would have to happen to keep Social Security viable so that they could collect pensions themselves in old age after having paid into the system for decades, jump on the anti-Social Security bandwagon, predict collapse, and clamor to have the system weakened or destroyed.

Many or most of the people trying to weaken Social Security have also been working to obstruct health care reform. If the United States weren't paying twice as much per capita for medical care without even providing universal coverage, the problems with Medicare (which are much more seriosu than the problems with Social Security) would be enormously diminished.

Unfortunately, Obama caved in to the insurance companies and the drug companies right off at the beginning, so many of the best arguments for healthcare reform were lost. But even his weak reform should be supported by deficit hawks, inless they have other agendas which are more important to them (which is almost always the case).

Hey, no problem! Low birthrates are a sign that a country is starting to develop: in particular that it's managing to educate its women and find jobs for them them that make it difficult to have children. But there are still plenty of countries -- mostly in Africa for some reason -- that don't look like they are ever going to be able to get their acts together, and will most likely keep on producing boatloads of children into the indefinite future. So as the people in the more successful countries die out, we'll just replace them with people from the least successful countries. What could possible go wrong?

I would like to propose a modification to the Social Security Pension system whereby you would not be entitled to receive any pension if you had not reproduced at least once - and thus adding a potential worker to add money into the system.

But how about redistribution of wealth so we don't have a few people making multi-million dollar annual salaries while the rest of us are trying to pay of college debts on wages under the poverty line? I think it's more important that those McDonalds employees are making a living, as opposed to it's executives making a fortune.

If more of the population can afford to set aside income for saving and investment, we'll probably see a better stimulus effect on the economy that concentrating it in the hands of a shrinking few.

Let's start with bringing back the estate tax on the wealthiest individuals.

Gokhale used to be with the Fed. He, Kent Smetters and Laurence Kotlikoff were hired by the Treasury dept. to audit Social Security and Medicare in 2003. Their findings were published by AEI and form the basis of Kotlikoff's 2004 book "The Coming Generational Storm" which deals with the unfunded liabilities of the two entitlement programs and advises some strategies for individuals.

Everybody writing about these topics is thinking three or four decades into the future. The ones who have an anti-social-security agenda take the worst scenarios, assume that they're inevitable and unstoppable, and reject any corrective response that doesn't fit their agenda.

Traditionally, and right now, the developed nations deal with labor shortages by immigration. But if you're against immigration too (in addition to public-sector spending and taxation), then these problems again seem impossible to deal with.

john, this isn't really a political blog. i don't get why you're refighting that war. in any case, the issue isn't with social security or gov. pensions, it's with pensions of ALL sorts. and it's with intergenerational wealth transfers, public and private.

and the problem isn't going to be just with developed countries, which as noted above may be able to maintain some level of social order by changing taxation, benefits or immigration. it will be with developing countries (which i hinted at above showing the low TFR's in some developing countries). you seem intent on arguing about what you can argue about all over the web. i'm sure we're going to be arguing about social security and medicare at some point in the next 10 years anyway, not of great concern to me.

the bigger issue, which is less discussed, and that i would like to spotlight, is the lack of gains in productivity for over a generation now. the impact that this would have on pension funds is almost incidental. rather, the question is whether people can accept being much poorer in terms of disposable income than today, and discernibly poorer in their lifestyle when they were younger (or as children). people dealt with this before 1800, when there were normal fluctuations in malthusian parameters. but the world before 1800 was very different, and i really think if that's the future then arguments about social security privatization are going to seem rather small-bore.

We'll likely have to shift taxation from labor to capital if we want a decent shot at funding entitlements and government while keeping the economy vibrant (and therefore, technological advance). This is especially important as automation continues to displace workers from large segments of the economy.

Razib, I usually respect that. But this is one of the big political issues of today and will remain so, and you cited a Bush administration / Cato institute / Heritage Foundation source which was making a best case for one side of the issue, and those are three extraordinarily partisan organizations.

john, that's fine. i could have found an institution with less loaded agenda. since i think that the probability of there being serious discussions changes to social security is pretty much zero until beyond 2020 i didn't really weight that too much. in any case, what do you think about my bigger point that as a species the decline in productivity gains since 1970 combined with shift in dependency ratios across the world by 2050 is something to worry about?

i did emphasize projections of course, because those can always be wrong. libertarians like to be skeptical about environmental doom-saying precisely because of the false extreme predictions based on technology circa 1970 were alleviated in part due to innovation and development (e.g., we use a lot less water per capita in the USA today than we did then).* but what if there's a long term trend which suggests that innovation is petering out? before 1800 the null was reasonable to assume that nothing would ever get better, it never really had for the median human.

Razib - I believe you've hit on the fundamental problem - while our measured productivity may not be literally declining, our ability to grow our economy has become seriously impaired over the last 40 years. I wrote about this here. And the mess we're in can't be helping. The anemic growth we've had over the past two decades (and getting more and more anemic) is not going to satisfy the assumptions in the Social Security trust fund models. I don't see any scenario that suddenly jolts us into renewed vigorous growth.

John Emerson - I sympathize with your annoyance. We've had what might be called a rape of the economy at the hands of the free-marketing fundamentalists, and their solution is to pillage Social Security. But immigration is not going to cut it - not the kind of immigration we have now. A population of young people that is a majority "minority" is not going to be able to - and perhaps not even willing to - fund old people's retirements. When you consider the cost of education, I have serious doubts that Mexican-Americans can even fund themselves. The alternative would be to brain-drain the Third World, but then that leaves the developing world in even worse shape than being suggested.

This also lines up with a massive expansion in educational attainment: 24.5% had high school degrees in 1947 while 59.8 had them in 1973. 5.4% had 4 or more years of college in 1947 while 12.6% did in 1973.

I would speculate that the the massive productivity gains were due to a massive resorting of American society along cognitive lines; from 1940 to 1970 a large number of high ability people who were previously locked into agriculture and industry were able to sort themselves into more innovative positions. This would lead to a massive burst of innovation, which led to increases in productivity, as previously unlocked talent was put to use.

From 1970 to 1990 this resorting was mostly winding down and productivity in the economy was heavily constrained by the population due to people still being necessary for most tasks and most of the potential innovation overhang being used up from 1940 to 1970.

Although computers were increasingly able to challenge people on some tasks during the 1970's, their effect was small (although increasingly noticeable in how long it took employment to rebound after recessions from 1980 on). From 1995 on productivity gains began to accelerate due to computers hitting a tipping point and their increasing ability to replace or augment people in areas across the economy.

Wages remain stagnant post-2000, because a growing number of people are being displaced at the lower levels of economic activity and competing for jobs that are ultimately constrained by the population, services (this would have happened earlier, but was masked by the initial burst of innovation following the cost of information falling to zero). Most of those displaced do not have the cognitive ability to perform economically useful innovation due to the sorting during the 1940-70 period and are unable to take advantage of the jobs on the high end of the income scale. An income gap forms and begins to accelerate.

Because most government revenue is based on labor and most of the productivity gains are being invested in capital, revenues are not increasing as quickly as the overall economy.

Additional speculation:
The retirement of baby boomers may actually help initially due to the same amount (or more) of money being invested in a smaller labor pool and, therefore, higher wages (probably not enough to cover projected shortfalls however). The downward pressure of technology will eventually overwhelm any upward pressure on wages though for most of the workforce though.

"in any case, from what i can tell the gains are currently not great enough to forestall declines in living standard due to shifts in dependency ratio."

Kotlikoff explained that the dependency ratio is especially important because an average pensioner consumes far more resources than a child in industrialized countries even though both are dependents. Obviously it doesn't have to be that way. It probably isn't so disproportionate in undeveloped countries. I think we all know retirees living in four bedroom houses who have two cars etc. Two children would have no cars and often share one bedroom. Children also consume less healthcare. Essentially all pension schemes are pyramid schemes because they all assume a discount from future to the present based on growing value of investments. We saw productivity gains during the transition from a population pyramid to an inverted pyramid as more women started working because the number of workers grew faster than the population. However, once we have a secular decline of educated/educable/productive workers in real terms, it isn't clear how there can be productivity gains without some new tech revolution as you suggest. The less developed countries will suffer because some of their most educated and productive workers will leave to offset any shortages in developed countries.

I'm puzzled by the comment about how it would be necessary to shift taxes from labor to capital. Capital is much more mobile than labor, making it more elastic to taxation. The real revenue-raiser is VAT.

Entitlements and a substantial fraction of other revenue is raised through income taxes. As automation makes human labor less value, fewer resources are contributed to it, while more is moved into capital (like the computers necessary to automate). Ergo, the total taxable value in the economy declines even though the rest of the economy is growing.

Put another way, for most of the last century, the demand for labor kept bumping up against the limit of available supply (full employment) driving up wages. Automation is making your average worker less necessary and wages are stagnating, causing a decline in income tax revenues.

I'm amazed by the easy assumption many of these discussions make that old people can "continue working." What exactly is a (say) 66 year old supposed to do? In my lifetime, the job market has tended ever more in the direction of favoring young people. They're young, they're inexperienced, they're cheap, they're energetic and ambitious, they'll do as they're told, they're more open to new technology, etc. Older people move slower, have some experience to compare the present to, are more attached to older ways, have built up vacation time and cost of living raises, think they know better, etc. Who needs that?

Plus, more and more, older people get laid off as soon as companies can figure out how to get rid of them. The company I used to work for has gone through three downsizings in the last couple of years. I doubt more than a couple of people over 55 work there any longer.

Plus: skill sets don't seem to last as long as they once did. I was downsized a couple of years ago, and the media business I was in has changed so much since that, despite all my experience in the field, I doubt I'd be a viable candidate for almost any job in it today.

I mean, it's a real practical problem. Because of age, we can't do heavy physical work. Young people have nooooo idea how the aches and pains build up, or how the energy subsides, with age. Our office skills are so five years ago. Contemporary technology baffles us. We can't even stand on our feet long enough to work at a fast-food place. And there are only so many parttime jobs available as greeters at Wal-Mart.

So, tell me again what role we're expecting these downsized/laid-off/made-obsolete older people to play in the economy?

Short version of the above: At the same time that we're talking more and more about making the official retirement age higher and higher, we're creating an economy in which older people are increasingly irrelevant.

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